424 F.

2d 296

In the Matter of CARNELL CONSTRUCTION CORP., a

corporation of the State of New York, authorized to do business
in the State of New Jersey, Frank Ambrosio, and Joseph
Catalanotti, a/k/a Joseph Conti, Debtors,
James E. Masterson, Receiver-Appellant,
Valley National Bank of Long Island, Appellee.
No. 18032.

United States Court of Appeals, Third Circuit.

Argued December 19, 1969.
Decided April 10, 1970.

Jack L. Cohen, Newark, N. J., for appellant.

Bernard Jeffrey, Mullooly, Jeffrey & Rooney, Garden City, N. Y., for
appellee.
Before McLAUGHLIN, FREEDMAN and ADAMS, Circuit Judges.
OPINION OF THE COURT
GERALD McLAUGHLIN, Circuit Judge.

This is an appeal by the Receiver from an order of the United States District
Court for the District of New Jersey holding that the Bankruptcy Court did not
have jurisdiction over the matter now before us.

In May 1967, the debtor, Carnell Construction Corp., a New York corporation,
filed in the New Jersey District for a Chapter XI arraignment with its creditors.
At the time of filing, appellee Valley National Bank of Long Island, New York,
held a security interest in two automobiles owned by and in the possession of
said debtor. The Bank subsequently filed a proof of claim with the Bankruptcy
Court, asserting that there was a balance due it from the debtor on the
automobiles totalling $5,628.67. In addition to that automobile financing, and
also prior to the filing of the Chapter XI proceeding, Carnell had owed Valley

National Bank $85,000 on an outstanding loan and the Bank had applied the
amount of that loan in payment thereof from Carnell's deposit with it.
Thereafter, in the New Jersey District bankruptcy, the Receiver, alleging the
Bank had no right to use the $85,000 to satisfy its loan to Carnell, sought a
turnover order to compel the Bank to turn over to him the said sum of $85,000.
The Bank entered a special appearance urging that the Bankruptcy Court lacked
both in personam and subject matter jurisdiction. The Referee concluded that
such jurisdiction existed. The Bank brought the issue to the District Court by
petition for review. That tribunal held that the Bankruptcy Court had no
jurisdiction over the admittedly unrelated claim of the Receiver and reversed
the conclusion of the Bankruptcy Court. As stated the Receiver appeals from
that ruling.
3

The issue before us is simply whether because of the Bank's filing of a proof
of claim concerning its security interests in the two automobiles it had financed
for the debtor the Bankruptcy Court has summary jurisdiction to determine
the Receiver's completely unrelated claim to the $85,000. Appellant does not
contest the District Court's conclusion that "The $85,000 matter had nothing
whatsoever to do with the Bank's $5,628.67 claim (arising from the automobile
financing transaction.)" In the Matter of Carnell Construction Corp. No. B-78967 (D.N. J., May 13, 1969).

Appellant's main argument is that the court below, in effect, misconstrued

Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966), and that
in Katchen the Supreme Court has already decided the problem now before us
adversely to appellee. We disagree.

Katchen stands for the proposition that a bankruptcy court has summary
jurisdiction to affirmatively order a claimant to surrender voidable preferences.
The Bank was of course subject to a proper counterclaim by the Receiver.
Alexander v. Hillman, 296 U. S. 222, 56 S.Ct. 204, 80 L.Ed. 192 (1935).
Further, Katchen has made it clear that where bankruptcy jurisdiction is
indicated, a claimant's jury trial right (which might obtain in a plenary
proceeding) is subordinated to the statutory scheme of the Bankruptcy Court
and its summary jurisdiction. Hence, the warning in Gill v. Phillips, 337 F.2d
258, 262 (5 Cir. 1964) that "* * * consent to summary jurisdiction is not to be
lightly inferred" is sound. As the court wrote in In Re Beasley-Gilberts, Inc.,
285 F.Supp. 359, 361 (S.D.Ohio, 1968):

"It is settled that a creditor who proves a claim submits himself to the summary
jurisdiction of the Bankruptcy Court in respect of preferences or voidable
transfers, including the jurisdiction of the Bankruptcy Court to enter a monetary

judgment or order a return. Katchen v. Landy, supra. It also appears to be fairly

well settled that a creditor who files his claim in the Bankruptcy Court
impliedly consents to be sued on counterclaims arising out of the same
transaction, but that such a filing does not constitute implied consent to be sued
on an alleged cause of action arising out of a different subject matter."
7

Examination of the background of Katchen completely affirms the District

Court's conclusion that Katchen did not alter the law as to a Bankruptcy Court's
summary jurisdiction over counterclaims not related to the creditor's claim. In
the Court of Appeals, Katchen v. Landy, 336 F.2d 535 (10 Cir. 1964), four
counterclaims were involved, three concerning voidable preferences, and one
unrelated counterclaim grounded on an allegation that the claimant owed the
bankrupt corporation money on unpaid subscribed organization stock. The
Court of Appeals affirmed the finding of jurisdiction over the related
counterclaims, but reversed as to the unrelated counterclaim. The sole question
before the Supreme Court dealt with the question as to the related
counterclaims over which the determination of jurisdiction had been affirmed
by the Court of Appeals. And it was this holding that the Court affirmed. In
fact, the Court noted that several Courts of Appeals, including this Court (citing
in re Solar Mfg. Corp., 200 F.2d 327 (3 Cir. 1952), cert. denied sub nom.
Marine Midland Trust Co. v. McGirl, 345 U.S. 940, 73 S.Ct. 831, 97 L.Ed.
1366), "* * * have stated that * * * (a bankruptcy's court summary) jurisdiction
does not extend to permissive counterclaims arising out of distinct
transactions."

It is clear then that the court below was correct in ruling that our previous
decision in Solar, supra, controls this case, and that in this Circuit a Bankruptcy
Court does not have jurisdiction over a counterclaim interposed by a Receiver
which is unrelated to the creditor's claims. Since, as we mentioned, it is not
disputed that the Receiver's "counterclaim' for the $85,000 is unconnected to
the Bank's proof of claims concerning its security in the automobiles, Solar is
dispositive.

In addition to the above outlined cogent reason for upholding the order of the
District Court it is obvious that the Bank's set-off of Carnell's deposit to the
amount of Carnell's indebtedness to the Bank was not a preference since under
Section 68 of the Bankruptcy Act as construed by the decisional law the Bank
had the right to make the set-off. See 4 Collier on Bankruptcy, 68.16(2) (4th
ed. 1969).

10

The order of the District Court will be affirmed.